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Kate Linebaugh: Before last week, husband and wife duo, Ilya Lichtenstein and Heather Morgan were known if they were known at all, as entrepreneurs in the cryptocurrency space.
Paul Vigna: They’re both in their thirties. They were both entrepreneurs. They had a couple of different companies. They weren’t well known in the crypto world, but they were in the crypto world.
Kate Linebaugh: Our colleague, Paul Vigna covers crypto.
Paul Vigna: Ilya had gone through a Silicon Valley, it’s sort of a training program for entrepreneurs called Y Combinator. It’s actually very, very famous. Heather had a couple of companies also. She was a contributor for Forbes. She wrote articles for Forbes, and she had this whole other career as a rapper.
Heather Morgan: (Singing).
Paul Vigna: She called herself Razzlekhan and she wrote rap songs and made rap videos. One is about smoking pot in a graveyard and the spirit of possibly her grandfather comes. Another is just about making money on Wall Street.
Heather Morgan: (Singing).
Paul Vigna: Razzlekhan, the Versace Bedouin, the Crocodile of Wall Street. It’s all this very making money and taking names.
Kate Linebaugh: Normally, Paul probably wouldn’t be quoting the lyrics of a rapping Forbes contributor, but last week, the US government filed a criminal complaint that cast Lichtenstein and Morgan in a very different light. The feds are alleging that the couple conspired to launder Bitcoin from one of the biggest cryptocurrency heists of the past decade.
Welcome to The Journal, our show about money, business and power. I’m Kate Linebaugh. It’s Tuesday, February 15th. Coming up on the show, one couple, a historic heist and how the government recovered billions of dollars in stolen Bitcoin. Paul Vigna has been on the crypto beat for a while now.
Paul Vigna: Since the spring of 2013.
Kate Linebaugh: Nine years. It’s like a century in crypto time.
Paul Vigna: It’s like two centuries in crypto terms, right.
Kate Linebaugh: Paul says in those nine years, the hack that would eventually lead to the arrest of Lichtenstein and Morgan stands out. It happened in 2016 to a cryptocurrency exchange called Bitfinex.
Speaker 5: Bitcoin are tumbling after one of the largest exchanges for the digital currency said it had been hacked.
Speaker 6: Bitfinex had announced about 10 hours ago that there was a security breach.
Speaker 7: Nearly 120,000 bitcoins were stolen from accounts. That’s about $70 million.
Kate Linebaugh: Like other exchanges, Bitfinex offers users the ability to store their bitcoins in something called a wallet and it lets them trade bitcoin for other cryptocurrencies. Paul remembers when news of the hack broke.
Paul Vigna: Somebody got onto the exchange, they compromised security. They got into the accounts. They got into Bitfinex’s wallets where they hold their customer’s bitcoins and they stole 120,000 bitcoins. At the time, that was worth about $70 million. It was a very big deal for the Bitcoin ecosystem at the time. This was the biggest exchange. They lost a lot of their customers’ money and it really sent home the message that this is an extremely new asset class and the infrastructure being built for it is not mature and that they were vulnerable.
Kate Linebaugh: Was there any hope for those Bitfinex users that they were going to get their money back at that time?
Paul Vigna: No. Bitfinex came with a workaround to kind of make them whole again, but the actual money that they had there was, for all intents and purposes, it was gone.
Kate Linebaugh: Gone until last week.
Paul Vigna: So the big news last week was that the US justice department traced the money.
Speaker 8: The cryptocurrency was stolen in 2016 when the virtual currency exchange, Bitfinex was hacked.
Speaker 9: The Department of Justice now has the bulk of the money, calling this its largest financial seizure ever.
Paul Vigna: Depending on where the price of Bitcoin is as people are listening to this, this is a three and a half, 4 billion, four and a half billion dollar bust.
Kate Linebaugh: 120,000 bitcoins went missing in 2016. Now the Feds were saying they’d gotten most of it back. And while they still haven’t identified who was behind the original hack, the government did announce that it was charging two people with trying to launder the stolen loot.
Speaker 10: The department has charged Ilya Lichtenstein and Heather Morgan for their alleged roles in a conspiracy to launder stolen cryptocurrency.
Kate Linebaugh: Ilya Lichtenstein and Heather Morgan.
Paul Vigna: It’s really interesting that they do not accuse them of the hack itself. They have not been charged with the hack. They’ve been charged with trying to launder the money that came out of the hack.
Kate Linebaugh: We reached out to lawyers for Lichtenstein and Morgan. They didn’t respond to our request for comment. But in a court filing, the lawyers wrote that the government’s accusations are “predicated on a series of circumstantial inferences and assumptions”. And to be clear, at this point Lichtenstein and Morgan haven’t been convicted of any crime. Our account of what they’re alleged to have done is drawn from the government’s criminal complaint.
In 2016, the year of the Bitfinex hack, friends say Lichtenstein and Morgan were living in the Bay Area and in some ways they were polar opposites. Lichtenstein was the introverted tech whizz. In an online profile, he bragged that he started coding at age nine. Morgan was the outgoing world traveler. She lived in Cairo, Hong Kong and Turkey. The complaint doesn’t explain how prosecutors think Lichtenstein and Morgan ended up with the stolen bitcoins.
Paul Vigna: What we do know is that at some point, at least as far back as 2017, these bitcoins end up in accounts the government is alleging that were controlled by Ilya and Heather.
Kate Linebaugh: And then what?
Paul Vigna: And then what? The government alleges that over the course of years, they were moving this money around the Bitcoin blockchain.
Kate Linebaugh: According to the government, they were conspiring to launder the money, moving that bitcoin around so that it would be harder to trace it back to the Bitfinex hack. And what exactly did that Bitcoin laundering look like?
Paul Vigna: The actions that the government describes are the typical actions of crypto money launderers. They open up wallets that they control. They’re called unhosted wallets. The benefit of that is you’re not providing any identifying information to anybody. So they have a bunch of these unhosted wallets and they start moving the bitcoins around between them according to the government.
Kate Linebaugh: The justice department described these as sophisticated laundering techniques. Were they sophisticated?
Paul Vigna: Yes, yes and no. None of them on their own are particularly complicated. It’s not hard to download the Bitcoin software and host your own wallet. It’s not hard to open up account at an exchange. It’s opening up multiple accounts at multiple exchanges, having multiple unhosted wallets controlling this sort of vast little private infrastructure to move money around. None of it’s complicated on its own, but when you put it all together, it’s a really big operation.
Kate Linebaugh: And what was the point of that big operation?
Paul Vigna: You’re doing two things really. One, you’re trying to hide your money trail because Bitcoin is far more trackable than physical cash. So you’re trying to hide your money trail so that it is just this really, really convoluted course that the money takes that if anybody wants to follow it, it’s going to be very difficult. Then you have to find a legitimate place to unload it.
Kate Linebaugh: Prosecutors allege that Lichtenstein and Morgan tried to unload the stole bitcoin or turn it into actual money and other goods. And they allegedly did it in a few ways, by using Bitcoin cash machines to convert bitcoin into dollars, by using stolen Bitcoin to buy gold in NFTs and by purchasing a $500 Walmart gift card.
Paul Vigna: According to the government, they actually had an account online with a gift card provider and they bought a bunch of different gift cards to Walmart and different things. And that was another way the government is saying that they unloaded this money.
Kate Linebaugh: Buy stuff at Walmart.
Paul Vigna: Buy stuff at Walmart. You need stuff and you got money, buy it at Walmart.
Kate Linebaugh: All told, prosecutors say Lichtenstein and Morgan only laundered a small percentage of the coins taken in the hack. And if they were living large off their crypto riches, Paul says it’s not obvious from Morgan’s social media presence or her videos.
Paul Vigna: You can kind of get glimpses of their life through these videos. They had a nice Manhattan apartment, but it wasn’t insane. They were a young working couple with a cat living in a nice Manhattan apartment who were entrepreneurs.
Kate Linebaugh: And then last month, federal agents raided that nice Manhattan apartment. That’s after the break.
Connecting Lichtenstein and Morgan to Bitfinex’s stolen coins wasn’t easy. Investigators say it involved tracking the stolen coins through thousands of transactions. The government’s complaint includes elaborate flow charts, showing how investigators think the money moved, from Bitfinex through dozens of private and faked accounts to accounts Lichtenstein and Morgan created using their real world identities. Investigators were able to do all of this because for law enforcement, cryptocurrency has a big advantage over cash. It’s radically transparent.
Paul Vigna: So every single transaction in Bitcoin’s history from 2009 to this very second is publicly viewable by anybody. You can trace every single step that every single bitcoin that has ever been created has taken.
Kate Linebaugh: Anybody like me, like right now?
Paul Vigna: Anybody like you, like right now, yes. Do you want me to walk you through it?
Kate Linebaugh: Yeah.
Paul Vigna: Okay. Go to blockchain.com.
Kate Linebaugh: Blockchain.com. Okay.
Paul Vigna: There are a couple tabs up there.
Kate Linebaugh: Yeah.
Paul Vigna: Go to the Explorer tab.
Kate Linebaugh: Explorer tab.
Paul Vigna: Yeah.
Kate Linebaugh: It kind of looks like my Fidelity 401k account here.
Paul Vigna: Yeah. It looks like your Fidelity… If you look on the lower right hand side-
Kate Linebaugh: Lower right.
Paul Vigna: … you’ll see one that says latest transactions.
Kate Linebaugh: Yes. These are like live Bitcoin transactions.
Paul Vigna: Those are the transactions. There’s a timestamp. There’s the amount and how much it is in dollars. Yeah.
Kate Linebaugh: $115. $42,000. Okay. Things are happening on the blockchain.
Paul Vigna: Yeah. There’s a $3 million transaction that just crossed.
Kate Linebaugh: Really?
Paul Vigna: There’s a $55 transaction. There’s a $1 transaction that just crossed.
Kate Linebaugh: Oh, I see the $3 million one. Yeah.
Paul Vigna: Yeah.
Kate Linebaugh: But I cannot tell who this transaction…
Paul Vigna: No, no. The identity of the person is not part of the information contained in a transaction. So if you’re a government agency, it becomes really enticing because if you’re a government agency trying to track illicit funds, it’s all right there. It is all right there. You can trace every single step that that money has taken. You don’t know who did it.
Kate Linebaugh: That must be so frustrating for government investigators.
Paul Vigna: Yeah. I imagine it has to be. I mean, it’s not an easy thing to do.
Kate Linebaugh: You’re like, “Here it is. Here it is but I don’t know who did it.”
Paul Vigna: Right. You know everywhere that this money has gone on Bitcoin’s blockchain. You don’t know who’s doing it. That’s the part that kind of comes back to some real world gum shoe work. You have to figure out who’s doing it.
Kate Linebaugh: Every time Lichtenstein and Morgan allegedly moved Bitfinex’s stolen coins around, those moves were public. Anyone, including the feds could see it. The challenge was linking that complicated flow of money to the people actually doing the moving. That’s where all the cryptocurrency tracking came in. Investigators say they were able to connect Bitfinex’s stolen coins to over a dozen accounts Lichtenstein and Morgan created either in their own names or in the names of their businesses. For example…
Paul Vigna: The government is saying that Ilya opened up an account on an exchange. And when he did it, he had to provide identifying information. And he gave a selfie and a copy of his driver’s license. And he opened up an account like any normal person would do.
Kate Linebaugh: When Lichtenstein allegedly bought gold with some of the stolen funds, he shipped it to his real address. And when the couple allegedly used that Walmart gift card, their orders were delivered to their real Manhattan apartment.
In early January, the fed showed up at the couple’s apartment with a search warrant. Lichtenstein and Morgan and their cat were home at the time. In the search, agents say they found $40,000 in cash and a plastic baggy labeled burner phones. A search of the couple’s files turned up other evidence, a folder labeled personas, links to buy passports on the dark web, and access information to a very important cryptocurrency wallet. Inside that wallet were almost 95,000 bitcoins, most of the missing coins from the Bitfinex hack. The government seized the coins worth about $3.6 billion.
Speaker 10: Today the Department of Justice has dealt a major blow to cyber criminals looking to exploit cryptocurrency.
Kate Linebaugh: The justice department announced the seizure in a video last week.
Speaker 10: The message to criminals is clear. Cryptocurrency is not a safe haven. We can and we will follow the money no matter what form it takes.
Paul Vigna: Cryptocurrencies, as convenient as they are for criminals, have actually turned into an extremely powerful tool for law enforcement. It’s better than cash. It’s easier to track. It is traceable. You can try to cover your tracks, but you can’t erase your tracks. And if the government wants to throw enough resources and time at it, they can absolutely trace every single step that Bitcoin takes. And if they can tie a real world identity to that transaction history, they’ve been able to catch the people that have done it. You are now seeing just how good the government has gotten at crypto.
Kate Linebaugh: A week after the government seized the stolen Bitcoin, Ilya Lichtenstein and Heather Morgan were arrested at their Manhattan apartment. At a hearing yesterday, a federal judge said Morgan could be released but that Lichtenstein should remain in detention until the trial. The government’s investigation into the Bitfinex hack is ongoing.
That’s all for today, Tuesday, February 15th. The Journal is a co-production of Gimlet and The Wall Street Journal. Additional reporting in this episode by James Fanelli, Ben Foldy, Dustin Volz and Aruna Viswanatha. Thanks for listening. See you tomorrow.
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